This blog has previously covered the ongoing litigation concerning California’s Resale Royalties Act (CRRA). A federal district court recently struck down the state statute on the grounds that it is preempted by federal copyright law, dealing a heavy blow to artists seeking royalties in connection with the resales of their artworks.

The CRRA

Our earlier posts contain fuller discussion of the background, but in short, American law generally follows the “first sale doctrine,” under which artists usually control only the initial sale of an original artwork, and receive no compensation for subsequent resales of the same work. In 1976, California passed the CRRA, and in doing so became the sole United States jurisdiction to impose a droit de suite system (similar to laws in place in Europe and elsewhere), under which artists and their heirs receive a royalty-type fee every time the artist’s original artwork changes hands.

As drafted, the CRRA requires a seller of fine art to pay a work’s artist five percent of the resale price of a work whenever “the seller resides in California or the sale takes place in California.” Cal. Civ. Code § 986(a). The artist’s rights are not waivable, although no royalties need be paid on works resold for less than $1,000, or for less than the seller originally paid. An artist’s heir may assert that artist’s royalty rights for 20 years after the artist’s death. The CRRA also requires agents of art sellers, such as dealers and auction houses, to withhold 5% of a sale’s proceeds, and to locate and pay the artist the statutory royalty. If the agent cannot locate the artist within 90 days, the fee goes to the California Arts Council, who will continue the search for seven more years; after that, the Council keeps the funds to “use in acquiring fine art.” If an agent fails to fulfill its responsibilities under the law, the artist or his heirs can sue the agent.

The Lawsuit

In 2011, representatives of a handful of prominent artists (including Chuck Close, Laddie John Dill, and Sam Francis) filed proposed class actions against Christie’s, Sotheby’s, and eBay, alleging that the defendants, in auctioning artworks, had systematically violated their obligations to pay royalties owed to the artists under the CRRA.

In May 2012, a district court judge dismissed the artists’ claims, holding that the plaintiffs could not enforce the CRRA because it violated the Commerce Clause of the U.S. Constitution by purporting to regulate commerce occurring wholly outside California’s boundaries. See Estate of Graham v. Sotheby’s Inc., 860 F. Supp. 2d 1117 (C.D. Cal. 2012).

The CRRA’s drafters had included a severability clause in the statute, which specified that if any portion of the law were declared invalid, the rest of the law should still be enforced. The artist plaintiffs, relying on this clause, argued that even if the CRRA were unconstitutional as applied to certain out-of-state transactions, the courts should preserve the remainder of the law. But the district court concluded that the CRRA was not severable, opining that the state legislature would not have enacted a bill targeting only art sales in California (particularly given that such a result might incentivize art sellers to leave the state to avoid paying a CRRA royalty). The court thus concluded that the entire CRRA must be struck down, and that the plaintiffs’ claims therefore must be dismissed.

The Ninth Circuit Appeal

The plaintiffs appealed to the Ninth Circuit, and in May 2015, a majority of the en banc panel ruled that the CRRA’s clause regulating sales outside California did indeed violate the Commerce Clause to the extent that it purported to apply to out-of-state sales by California residents, because there existed scenarios where CRRA royalties might be owed even where the work, the artist, and the buyer had no connection with California. But the majority also held that the unconstitutional portion of the CRRA could be severed from the rest of the statute. See Sam Francis Foundation v. Christies, Inc., 784 F.3d 1320 (9th Cir. May 5, 2015), cert. denied, 136 S.Ct. 795 (Jan. 11, 2016). Remand to District Court

From the Ninth Circuit, the case was remanded to the three-judge panel and then to the district court, leaving the CRRA still partially on the books but with a shorter reach (i.e., the royalty requirement could only apply to art sales taking place within California’s borders), and leaving the artist plaintiffs with a smaller group of sales on which to focus their class action.

On remand, the district judge next took up several other arguments that had been previously raised by the defendants but had not yet been decided. Specifically, the defendants filed motions to dismiss, urging, among other things, that the CRRA was unconstitutional for the separate and additional reason that it is preempted by federal copyright law. On April 11, 2016, the district court ruled on these arguments, and agreed with Defendants that the CRRA is preempted under the Copyright Act of 1976.

Courts generally analyze preemption issues through the lens of two types of preemption: conflict preemption and express preemption. Conflict preemption applies when a state law actually conflicts with federal law or obstructs Congress’s objectives in enacting the federal law. Express preemption refers to instances where a “preemption clause” in a federal statute expressly displaces the challenged state law.

Here, the court held that the CRRA is unconstitutional under both types of preemption. With regard to conflict preemption, the court explained that the federal copyright laws are Congress’s way of striking “a difficult balance” between the interests of copyright holders and “the society’s competing interest in the free flow of ideas, information, and commerce,” and it is Congress’s job to “defin[e] the scope of the limited monopoly that should be granted to” creators of works; state laws are unconstitutional if they “disrupt that balance by broadening the scope of the copyright beyond what Congress intended.” The court explained that the federal copyright laws expressly codify the “first sale doctrine” (see 17 U.S.C. § 109(a)), which prohibits copyright holders from exercising downstream distribution control of their products—in effect, it directs that buyers of copyrighted works are free to dispose of them as they wish. In the court’s view, the CRRA, by regulating secondary transactions of fine art and permitting artists to recover unwaivable royalties from resellers, conflicts with the first sale doctrine by transferring market power from resellers to copyright holders—and thus “frustrates the purpose of § 109(a) and disrupts the equilibrium of the Copyright Act.” Indeed, the district court noted that, “[p]utting aside the costs of locating the original artist, a California art investor would lose money if she were to resell the art for less than 105% of the original purchase price. The royalty obligation thus acts as a disincentive for art investors to resell their art, thereby restricting the secondary markets for fine art in California. That result both undercuts the purpose of the first sale doctrine and inhibits the uniformity Congress sought to achieve by enacting the Copyright Act.”

The court acknowledged that the Ninth Circuit, in a 1980 case, had come to the opposite conclusion, ruling that the CRRA did not preempt the CRRA because “[t]echnically speaking [the CRRA] in no way restrict[s] the transfer of art works.” See Morseburg v. Balyon, 621 F.2d 972 (9th Cir. 1980). Rather, the Ninth Circuit in Morseburg had viewed the CRRA royalty as more like a tax on the proceeds from an art sale, not a restriction on the sale itself. But the district court analyzed Morseburg in light of more recent Ninth Circuit and Supreme Court precedent, and decided that Morseburg had been “so eroded” in the intervening years that it “no longer represents a binding interpretation of the first sale doctrine and the CRRA.” Indeed, the district court noted that the Ninth Circuit’s en banc majority decision in this case had expressly rejected the notion that the CRRA was only a regulation of sale proceeds analogous to a tax.

The district court further ruled that (conflict preemption and Morseburg aside), plaintiffs’ claims were also doomed by “express preemption.” It pointed to 17 U.S.C. § 301(a), stating that “all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright. . . are governed exclusively by this title. . . . [N]o person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.” Here, the court agreed with the defendants that the CRRA “does no more than broaden the distribution rights granted under the Copyright Act. By requiring sellers to remit royalties to the copyright holders, the CRRA fills the gap that Congress intentionally left open in § 109. The CRRA thus creates garden-variety copyright claims premised on a violation of the artists’ rights in the distribution of their artwork.” And if “a state law, like the CRRA, creates a copyright claim that Congress explicitly declined to create, it may be preempted under § 301(a).”

What’s Next

For now, the plaintiffs’ case is closed. But they have already announced their intention to appeal again to the Ninth Circuit—an unsurprising move, particularly given the district court’s conclusion that the earlier Ninth Circuit Morseburg case is no longer good law. Moreover, the case will likely continue to fuel debate about whether a federal royalty scheme for artists should be enacted nationwide. As our previous posts on this case have observed, the CRRA was one state’s answer to a policy question: should there be a mechanism for artists or their heirs to receive compensation for resales, particularly where a work has skyrocketed in value since its creation and initial entry into the market? So far, attempts to create such a federal solution have not gained much traction, and now, with the CRRA on the ropes, artists are beginning to give more consideration to options such as structuring primary-sale agreements with buyers so as to provide a royalty-type payment upon future resales, thus pursuing through private contract what the CRRA was trying to do through legislation. For now, the conversation about artists’ royalties will continue, in the courts, the legislatures, and in the market.